The basic problem with Unilever’s £50bn healthcare bid

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by Helen Thomas
Unilever, as we know from Terry Smith, is keen on purpose. And the purpose of its sudden announcement of a strategic rethink and organisational overhaul was very clear: damage limitation.

There’s no use crying over spilled mayonnaise, but the consumer goods group finds itself in a bit of a pickle.

Smith’s broadside last week about purpose-driven condiments and a management team “obsessed with publicly displaying sustainability credentials” highlighted broader investor dissatisfaction with Unilever’s lacklustre performance.

Then came this weekend’s revelation that Unilever had made three approaches to buy the consumer healthcare unit being spun off by GlaxoSmithKline. The £50bn price tag — already dismissed as too low — prompted concerns about elevated debt levels, an equity raise and what cost savings are really on offer from bolting the two portfolios of brands together. No wonder Unilever’s shares fell 8 per cent in morning trading.

There is, however, a more basic problem here.

Smith’s criticism was not just about whether or not Hellmann’s needs a waste-saving sine qua non. It was whether this kind of sustainable or socially-engaged management is being used as a smokescreen for poor execution.

But that is the rub: investors are questioning Unilever’s decision-making on issues such as sales growth versus margin preservation, around investment and innovation and on whether it has been aggressive enough in using deals to reinvigorate its massive portfolio of household, food, beauty and personal care brands.

Everyone should know this has little intrinsically to do with Unilever’s (laudable) commitment to sustainability because — as Bernstein’s Bruno Monteyne points out — we have had exactly this conversation before.

In 2007, Unilever was under fire for insipid share price performance thanks to “poor category growth, poor and unpredictable execution, insufficient capex [and] doubts about the culture”, says Monteyne. What happened, with former chief executive Paul Polman arriving a little over a year later, is that Unilever managed a twofer: in the next five years, it tackled concerns about the fundamentals while also re-upping on environmental and social impact.

Now, it’s the turn of Alan Jope, who took the top job in 2019. In fairness, Jope has identified the underlying problems. The company’s focus on profitability was Polman’s response to the rejected 2017 bid from rampaging capitalists Kraft Heinz, but that hasn’t served it well in the growthiest of growth-focused markets.

But Unilever, said Jope on Monday, last year was delivering its fastest underlying growth in eight years. The reorganisation he flagged is a wholesale replumbing of the bureaucratic Unilever empire — boring but important — and has been in train for more than a year.

Still, Unilever’s share price has gone sideways for five. The GSK unit, where toothpaste and vitamins could fit with Unilever’s new focus on health, beauty and hygiene and present opportunities in emerging markets, has been growing 3 per cent, hardly earth shattering and not dissimilar from Unilever’s average underlying growth.

The promise to investors is that this big buy would come with big sales, getting out of more sluggish areas such as food, which has typically grown at 1-2 per cent.

It’s more than that, though. One way or another, Unilever is going big game hunting (if its ESG framework ever possibly allowed such a thing).

It’s hard to find targets big enough to make a real difference in exciting, high-growth areas like prestige beauty. The costs and tax bill from unwinding businesses from Unilever’s tightly-bound structure are meaningful. Those need to be balanced by cost savings from a big purchase to make it really work. If it isn’t GSK’s business (and given the price expectations the pharmaceutical company apparently has, it may not be) the company will look for another big prey.

The trouble is that investors wary of a sustainability smokescreen will be equally sceptical of how the disruption and upheaval from large-scale dealmaking can act as a camouflage to problems on the shop floor. And that the natural response to concerns that a management team hasn’t done well enough in squeezing growth out of its existing £90bn collection of brands isn’t to hand it another £50bn to play with.

helen.thomas@ft.com
@helentbiz